MARCHEX, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believes," "intends," "expects," "anticipates," "plans," "may," "will" and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating results, financial position, prospects, acquisitions, dispositions, and business strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning future events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements we make. There are a number of important factors that could cause the actual results ofMarchex to differ materially from those indicated by such forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption "Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as amended, and those described from time to time in our future reports filed with theSEC . In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic may amplify many of these risks. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Overview
References herein to "we," "us" or "our" refer to
Marchex's conversation intelligence platform, that incorporates AI functionality to help with sales engagement and marketing solutions, helps businesses turn strategic insights into the actions that can drive their most valued sales outcomes. Our multichannel voice and text capabilities help enable sales and marketing teams to deliver the buying experiences that improves their customer experiences.Marchex provides its' conversation intelligence solutions for market-leading companies in numerous industries, including several of the world's most innovative and successful brands. We have a set of tools for enterprises that depend on phone calls, texts and other communication channels to help convert prospects into customers, to deliver compelling customer experiences during the sales process and maximize returns. Our mission is to empower performance improvements for our customers to grow by giving them real-time insights into the conversations they are having with their customers across phone, text and other communication channels.Marchex leverages proprietary data and conversational insights to deliver artificial intelligence-powered functionality that drives solutions and helps enable brands to personalize customer interactions in order to accelerate sales and grow their business.
Our primary product offerings are:
• Marchex Call Analytics. Marchex Call Analytics is an analytics platform for
enterprises that depend on inbound phone calls to drive sales, appointments
and reservations. Businesses use this platform to understand which marketing
channels, advertisements, search keywords, or other digital marketing
advertising formats are driving calls to their business, allowing them to
optimize their advertising expenditures across media channels. Marchex Call
Analytics also includes technology that extracts data and insights about
what is happening during a call and measures the outcome of the calls and
return on investment. The platform also includes technology that can block
robocalls, telemarketers and spam calls to help save businesses time and
expense. Marchex Call Analytics data can integrate directly into third-party
marketer workflows such as
Software, Facebook and Instagram, in addition to other marketing dashboards
and tools. Customers pay us a fee for each call/text or call/text related
data element they receive from calls or texts, or for each phone number
tracked based on pre-negotiated rates.
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• Marchex Call Analytics, Conversation Edition. Marchex Call Analytics,
Conversation Edition is a product that can enable actionable insights for
enterprise, mid-sized and small businesses. It leverages our proprietary and
patented speech recognition technology. Marchex Call Analytics, Conversation
Edition incorporates machine and deep learning algorithms and AI-powered
conversation analysis functionality that can give customers strategic,
real-time visibility into company representative performance in customer
interactions. The product includes customizable dashboards and visual
analytics to make it easier for marketers, salespeople, and call center
teams to realize actionable insights across a growing amount of call data.
According to a
conversational AI market is expected to grow at a compounded annual growth
rate of 22% from $6.8 billion in 2021 to $18.4 billion by 2026.
• Marchex Sales Engagement. The Marchex Sales Engagement suite of products
incorporate artificial intelligence-based functionality into each product,
enabling businesses to understand customer conversations in phone calls and
via text, in real-time and at scale, and helping them learn how to optimize
the sales process in order to take the right actions to win more business.
These sales engagement solutions can arm businesses with the data-driven
intelligence they need to deliver on-demand and personalized customer
experiences. Marchex Sonar Intelligent Messaging also provides a sales
engagement solution for SMS text message-based conversations. Marchex Sales
Enablement products include:
o Marchex Engage. Marchex Engage combines Marchex artificial
intelligence and machine learning with conversational call monitoring
and scoring services and can alert businesses when potential buyers
hang up without making an appointment or purchase, or when certain
calls do not meet the business' sales or customer service standards.
Marchex Engage, through Action Lists, can identify in real-time when
potential high-value customer prospects engaged inconversations with
sales representatives are mishandled in any number of ways and can
give businesses the opportunity to re-engage immediately to capture
these potentially lost opportunities, as well as avoid undesired
customer experiences. In addition, it can give businesses a more
complete picture of the in-bound opportunities they aremissing, while
also measuring the effectiveness and impact of capturing those
opportunities through outbound engagement.
o Marchex Spotlight. Marchex Spotlight is a product for corporate and
regional managers that can provide conversation performance insights
and trends measured against corporate benchmarks across a brand or
network of distributed business locations. The conversational data
analyses can provide critical sales insights and proactive
observations that can help enterprises boost outcomes across national
and regional sales organizations.
o Marchex Engage for Automotive. This 2021-award-winning-sales
engagement product for automotive dealers unlocks the content of
conversations with car buyers who have shown high purchase
consideration and enables sellers to prioritize their best leads,
deliver a better buying experience for consumers and take the right
actions to sell more vehicles. Integration with leading dealer CRM
systems enables sellers to make outbound calls viaclick-to-call from
within the CRM and frees up their time by automaticallyupdating the
CRM with enriched leads as they complete each inbound oroutbound
conversation. Marchex Engage for Automotive was the 2021recipient of
the Product of the Year award by the BIG Awards for Business and the
Sales and Marketing Technology Awards.
o Marchex Platform Services. Marchex Platform Services is an API-based,
easy to integrate solution that allows businesses to add Marchex
conversation intelligence to their existing workflows, enabling them
to decode what happens in their conversations with customers. It uses
the company's conversation classification technology to deliver
mission-critical conversation data for sales, customerengagement and
marketing teams so they can take decisive action in the course of the
customer journey when it matters most. Marchex Platform Services
enables businesses to obtain Marchex's artificialintelligence-based
functionality in Marchex's conversation intelligence platform directly
from their existing communications platforms.
• Marchex Marketing Edge. Marchex Marketing Edge is a conversational analytics
solution for marketers in enterprise, mid-sized and small businesses that
depend on inbound phone calls to drive sales, appointments and reservations.
It helps enable marketers to make data-driven decisions that improve
marketing performance. Marketers can use this solution to understand which
marketing channels, advertisements, search keywords, or other digital
marketing advertising formats are driving calls to their business, enabling
them to optimize their advertising expenditures across media channels.
During 2021, Marchex Marketing Edge received the MarTech Best Marketing
Attribution Solution award. In addition to call and text tracking,
Marketing Edge also includes conversation intelligence technology that can
automatically transcribe, redact and score calls. Marchex Marketing Edge
also seamlessly integrates with Marchex Engage so sales teams can be
empowered to receive real-time text and/or email notifications when a caller
showing high purchase intent ends a conversation without making an
appointment or a purchase so they can reengage to save the sale.
Marketing Edge includes technology that can block robocalls, telemarketers
and spam calls to help save businesses time and expense. Marchex Marketing
Edge data can integrate directly into third-party systems such as Google
Ads, Google Analytics, Search Ads 360, Google Campaign Manager, Microsoft
Advertising, Adobe, Kenshoo, Acquisio,
other marketing and chat offerings.
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•
solution for intelligent mobile messaging that enables sales, marketing, and
operations teams in businesses to engage in two-way communications with
field staff, prospects and customers via text/SMS messages. This can enable
communication that is personal to occur at scale, leading to significant
increases in critical actions, customer engagement and conversions.
According to a study done by Messagedesk, 76% of consumers already receive
text messages from businesses and 39% of businesses are using text messaging
to communicate with consumers.
• Call Monitoring.
view into every inbound or outbound call, from providing a call recording,
to offering services to create customized call performance scorecards, both
of which can help businesses learn more about their customers and enhance
service quality and customer satisfaction. Through these services,
businesses can customize the insights they want in order to improve business
practices and grow faster.
We operate primarily in domestic markets.
Our Strategy
Innovating on Conversational Intelligence Technology and Solutions. We plan to continue to expand and invest in our conversational intelligence technology and expand our AI, data science, and machine learning capabilities. We also plan to continue to expand our range of call, text, and other communication channels analytics and sales engagement product capabilities by growing our conversation intelligence solutions, including AI-driven speech technology solutions, call tracking, call monitoring, text communications, keyword-level tracking, display ad impression measurement and other products as part of our owned, end-to-end, call and text-based advertising solutions. Our expanding capabilities are enabling us to develop new solutions, like sales engagement and personalization solutions that enable us to take advantage of our growing conversational data assets. Supporting and Growing the Number of Customers Using Our Products and Services. We plan to continue invest in technology initiatives which we believe will enable us to access an wider base of businesses by offering our products to a new array of channel partners. Through these initiativesMarchex can now integrate with businesses existing communication providers or telephony infrastructure providers to offer its products and services. Increasingly,Marchex customers will no longer have to access separate telephony infrastructure to engage with our conversational intelligence suite of products but will instead be able to choose to access our products from within their existing communications provider of choice. We also plan to continue to provide a consistently high level of service and support to our conversational intelligence solutions customers and we will continue to focus on helping them achieve their return on investment goals. We are focused on increasing our customer base through our direct sales and marketing efforts, including strategic sales, inside sales, and additional partnerships with resellers. Pursuing Selective Acquisition Opportunities. We have historically and in the future may pursue select acquisition opportunities and will apply evaluation criteria to any acquisitions we may pursue in order to enhance our strategic position, strengthen our financial profile, augment our points of defensibility and increase shareholder value. We generally focus on acquisition opportunities that represent one or more of the following characteristics:
• revenue growth and expanding margins and operating profitability or the
characteristics to achieve larger scale and profitability;
• opportunities for business model, product or service innovation, evolution
or expansion;
• under-leveraged and under-commercialized assets in related or unrelated
businesses;
• an opportunity to enhance efficiencies and provide incremental growth
opportunities for our operating businesses; and
• business defensibility.
Evolving Our Business Strategy. Our industry is undergoing significant change
and our business strategy is continuing to evolve to meet these changes. In
order to profitably grow our business, we may need to expand our current lines
of business as well as explore new lines of business beyond our current focus of
providing mobile advertising intelligence products and services, which may
involve pursuing strategic transactions, including potential acquisitions of, or
investments in, related or unrelated businesses. In addition, we may seek
divestitures of existing businesses or assets. For example, in October 2020 , we
sold certain assets related to our Call Marketplace , Local Leads Platform and
other assets not related to core conversational analytics.
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Developing New Markets. We intend to analyze opportunities and may seek to
expand our technology-based products into new business areas where our services
can be replicated on a cost-effective basis, or where the creation or
development of a product or service may be appropriate. We have technology
integration partnerships and referral agreements with Adobe, Google Search, and
Salesforce , Facebook, and other third-party marketers. We anticipate utilizing
various strategies to enter new markets, including developing strategic
relationships; innovating with existing proprietary technologies; acquiring
products that address a new category or opportunity; and creating joint venture
relationships.
We were incorporated in
We have offices in
Recent Developments New Product Launch InMarch 2022 ,Marchex announced that it has launched Marchex Conversation DNA. This core technology enables voice and text conversation decoding, scoring, categorization and signal delivery across everyMarchex conversation intelligence product. Conversation DNA usesMarchex's proprietary AI infrastructure built to uncover relevant insights - such as what customers want and what they are searching for - from a library of more than one billion minutes of voice conversations and hundreds of millions of text messages the company processes each year. These valuable AI signals can help businesses understand how to anticipate customer needs in order to deliver highly personalized experiences.
Business Update
Our revenue grew$191,000 , or 1%, on a year-on-year basis as we experienced an increase in conversational volumes. We believe our revenue growth continues to be impacted by the lingering issues related to the resurgence of new COVID-19 variants, supply chain disruptions and labor shortages. However, we are opening more opportunities with our existing and new customers through multiple product offerings and our continued product innovation.
Our operating expenses continue to benefit as we make advancements in our technology infrastructure and cloud initiatives. Moving portions of our technology infrastructure to the cloud enables us to innovate through scale and a common architecture.
For additional information for the effects of the COVID-19 pandemic and resulting global disruptions on our business and operations, refer to "Results of Operations" within this discussion and analysis and Item 1.A of Part II, "Risk Factors".
Components of the Results of our Operations
Revenue
We generate the majority of our revenues from core analytics and solutions services. Our call analytics technology platform provides data and insights that can measure the performance of calls and texts for our customers. We generate revenue from our call analytics technology platform when customers pay us a fee for each call/text or call/text related data element they receive from calls or texts or for each phone number tracked based on a pre-negotiated rate. Customers typically receive the benefit of our services as they are performed and substantially all of our revenue is recognized over time as services are performed. In certain cases, we record revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third party refinement of the estimated and reported amounts owed that occurs subsequent to period ends.
Service Costs
Our service costs represent the cost of providing our services to our customers.
These costs primarily consist of telecommunication costs, including the use of
phone numbers relating to our services; colocation service charges of our
network equipment; bandwidth and software license fees; network operations; and
payroll and related expenses of personnel, including stock-based compensation.
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--------------------------------------------------------------------------------Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related expenses for personnel engaged in marketing and sales functions; advertising and promotional expenditures including online and outside marketing activities; cost of systems used to sell to and serve customers; and stock-based compensation of related personnel. Product Development
Product development costs consist primarily of expenses incurred in the research and development, creation and enhancement of our products and services.
Our research and development expenses include payroll and related expenses for personnel; costs of computer hardware and software; costs incurred in developing features and functionality of the services we offer; and stock-based compensation of related personnel. For the periods presented, substantially all of our product development expenses are research and development. Product development costs are expensed as incurred or capitalized into property and equipment in accordanceU.S. GAAP.
General and Administrative
General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel; professional services, including accounting, legal and insurance; bad debt provisions; facilities costs; other general corporate expenses; and stock-based compensation of related personnel. Stock-Based Compensation We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method. We account for forfeitures as they occur. Stock-based compensation expense is included in the same lines as compensation paid to the same employees in the Condensed Consolidated Statements of Operations.
Amortization of Intangibles from Acquisitions
Amortization of intangible assets excluding goodwill relates to intangible assets identified in connection with our acquisitions. The intangible assets have been identified as customer relationships; acquired technology; non-competition agreements; tradenames. These assets are amortized over useful lives ranging from 12 to 60 months.
Provision for Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax law is recognized in results of operations in the period that
includes the enactment date.
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--------------------------------------------------------------------------------Results of Operations
The following table presents revenue and results from operations and as a percentage of revenue (in thousands):
Three Months Three Months
Ended % of Ended % of
March 31, 2021 revenue March 31, 2022 revenue
Revenue $ 12,980 100 % $ 13,171 100 %
Expenses:
Service costs 5,422 42 % 4,935 37 %
Sales and marketing 3,637 28 % 3,165 24 %
Product development 5,322 41 % 3,460 26 %
General and administrative 2,620 20 % 2,606 20 %
Amortization of intangible assets
from acquisitions 1,181 9 % 531 4 %
Acquisition and
disposition-related costs
(benefit) 45 0 % 5 0 %
Total operating expenses 18,227 140 % 14,702 112 %
Loss from operations (5,247 ) -40 % (1,531 ) -12 %
Stock-based compensation expense was included in the following operating expense categories as follows (in thousands):
Three Months Ended March 31,
2021 2022
Service costs $ 8 $ 34
Sales and marketing 229 191
Product development 97 82
General and administrative 410 388Total stock-based compensation $ 744 $ 695
See Note 6. Stockholder's Equity of the Notes to Condensed Consolidated Financial Statements as well as our Critical Accounting Policies for additional information about stock-based compensation.
Revenue
Revenue increased 1% from$13.0 million for the three months endedMarch 31, 2021 to$13.2 million for the three months endedMarch 31, 2022 . The three months endedMarch 31, 2022 benefited from modestly higher call volumes in the first quarter of 2022 as compared to 2021. In the short term, we expect our revenues to be similar to modestly higher compared to the most recent quarters as we typically experience higher conversational volumes in the late spring and summer months. In addition, we will continue to monitor the potential volume changes as the business disruption caused by the continuing coronavirus pandemic evolves and macroeconomic conditions unfold. We expect our results to be volatile in the near-term as the pandemic and other macroeconomic impacts continues to be unpredictable. In the longer term, we believe that our new product releases and growth initiatives may enable the Company to have an opportunity for potential revenue growth. A preliminary indicator of this potential growth is that several customers and prospective customers have indicated that they plan to initiate trials and are considering the adoption of new products, which would result in new revenue opportunities.
For additional discussion of trends and other factors in our business, refer to Industry and Market Factors in Item 2 of this Quarterly Report on Form 10-Q.
Expenses
Service Costs. Service costs decreased$487,000 , or 9%, from$5.4 million for the three months endedMarch 31, 2021 to$4.9 million for the three months endedMarch 31, 2022 . As a percentage of revenues, service costs were 42% and 37% for the three months endedMarch 31, 2021 andMarch 31, 2022 , respectively. The decrease in dollars was primarily due to lower network costs due to our infrastructure initiatives, which include cloud migration initiatives, certain platform integrations and other initiatives of$432,000 . Additionally, the decrease in dollars benefited from$276,000 higher support service fees recovery. These were partially offset by$164,000 of higher personnel costs. We expect in the near and intermediate term that service costs in absolute dollars will be similar to modestly higher in relation to the most recent period. There may be a positive impact on service costs as a percentage of 19 --------------------------------------------------------------------------------
revenue and further benefit in the event we generate contribution from new launches of analytics products and sales engagement solutions.
Sales and Marketing. Sales and marketing expenses decreased 13% from$3.6 million for the three months endedMarch 31, 2021 to$3.2 million for the three months endedMarch 31, 2022 . As a percentage of revenue, sales and marketing expenses were 28% and 24% for the three months endedMarch 31, 2021 and 2022, respectively. The net decrease in dollars and as a percentage of revenue was primarily attributable to higher support service fees recovery of$220,000 , lower marketing costs of$202,000 , and lower personnel and outside service provider and stock-based compensation of$72,000 . We expect some volatility in sales and marketing expenses based on the timing of marketing initiatives but expect sales and marketing expenses in the near term to increase slightly as revenue increase. We also expect, to the extent that we increase our marketing activities, this could correspondingly also cause an increase as a percentage of revenue. We also believe going forward our travel related costs will increase slightly as pandemic related restrictions lift. Product Development. Product development expenses decreased 35% from$5.3 million for the three months endedMarch 31, 2021 to$3.5 million for the three months endedMarch 31, 2022 . As a percentage of revenue, product development expenses were 41% and 26% for the three months endedMarch 31, 2021 and 2022, respectively. The net decrease in dollars and as a percentage of revenue was primarily attributable to a net decrease in personnel and outside service provider and stock-based compensation totaling$1.3 million and higher support services fee recovery of$494,000 . We expect that product development expenses will be relatively stable in absolute dollars in the near term due to our technology infrastructure and cloud initiatives offset by an increase in the number of personnel and consultants to enhance our service offerings. General and Administrative. General and administrative expenses of$2.6 million for the three months endedMarch 31, 2022 was flat as compared to the three months endedMarch 31, 2021 . As a percentage of revenue, general and administrative expenses were 20% for the three months endedMarch 31, 2021 and 2022, respectively. We recognized higher support services fee recovery of$87,000 which was partially offset by higher amortization of$72,000 related to hosting software licensing arrangements. We also expect our general and administrative expenses to increase to the extent that we expand our operations and incur additional costs in connection with being a public company and regulatory updates including expenses related to professional fees and insurance, as well as a result of stock-based compensation expense. We also expect fluctuations in our general and administrative expenses to the extent the recognition timing of stock compensation is impacted by market conditions relating to our stock price. In addition, we anticipate that our general and administrative expenses may be adversely impacted by the continuing COVID-19 pandemic at least for the near term. Amortization of Intangible Assets from Acquisitions. Intangible amortization expense was$1.2 million and$531,000 for the three months endedMarch 31, 2021 and 2022, respectively. The amortization of intangibles related to service costs, sales and marketing and general and administrative expenses. Income Tax (Benefit). The income tax expense (benefit) for the three months endedMarch 31, 2021 and 2022 was$73,000 and$30,000 , respectively. The income tax expense for the three months endedMarch 31, 2022 consisted primarily ofU.S. state income tax expense. The effective tax rate differed from the expected tax rate of 21% due to a full valuation allowance, and to a lesser extent due to state income taxes, foreign rate differential, non-deductible stock-based compensation related to incentive stock options recorded under the fair-value method, federal research and development credits, and other non-deductible amounts. AtMarch 31 2022 , based on all the available evidence, both positive and negative, we determined that it is not more likely than not that our deferred tax assets (including Canadian deferred tax assets) will be realized and accordingly, we have recorded a 100% valuation allowance of$54.0 million against our net deferred tax assets$55.4 million of deferred tax assets that are partially offset by$1.1 million in reversing deferred tax liabilities). This compares to a 100% valuation allowance of$53.0 million atDecember 31, 2021 ($53.9 million of deferred tax assets that are partially offset by$1.0 million in reversing deferred tax liabilities). In assessing the realizability of deferred tax assets, based on all the available evidence, both positive and negative, we considered whether it is more likely than not that some or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. We considered the future reversal of deferred tax liabilities, carryback potential, projected taxable income, and tax planning strategies as well as the Company's history of taxable income or losses in the relevant jurisdictions in making this assessment. Net Income (Loss). Net loss was$5.3 million for the three months endedMarch 31, 2021 and a net loss of$1.6 million for the three months endedMarch 31, 2022 . The decrease in the net loss for the three months endedMarch 31, 2022 was primarily attributable to lower operating expenses of$3.5 million in the product development, service cost, and sales and marketing functional areas. 20 --------------------------------------------------------------------------------
Liquidity and Capital Resources
As ofDecember 31, 2021 , andMarch 31, 2022 , we had cash and cash equivalents of$27.1 million and$24.6 million , respectively. As ofMarch 31, 2022 , we had long-term contractual obligations of$4.4 million , of which$3.0 million is for rent under our facility operating leases. Cash used in operating activities was$1.4 million for the three months endedMarch 31, 2022 . The cash used in operating activities was primarily a result of a net loss of$1.6 million adjusted for non-cash items of$2.1 million , which primarily included depreciation and amortization and stock-based compensation, and changes in working capital of$1.9 million , which primarily included increases in accounts receivable and prepaid expense and other current assets offset by an increase in accounts payable account balances. Cash used in operating activities was$5.6 million for the three months endedMarch 31, 2021 . The cash used in operating activities was primarily a result of a net loss of$5.3 million , adjusted for non-cash items of$2.5 million , which primarily included depreciation and amortization and stock-based compensation, and changes in working capital of$2.8 million , which primarily included increases in accounts receivable and other current asset balances and decreases in accounts payable and accrued payroll account balances. We expect that, at least for the near term, our revenues may continue to recover if macroeconomic conditions improve and business interruptions caused by the continuing pandemic subside resulting in increased demand for our products and services. However, we continue to monitor the potential disruptions caused by future iterations of COVID-19 and supply chain issues that have ensued, which could cause our revenues to be lower than current levels if customers are unable to procure our services at the same volumes as previously. The adverse impact would reduce our operating cash flows and liquidity going forward. Cash used in investing activities for the three months endedMarch 31, 2022 andMarch 31, 2021 was$1.1 million and$100,000 , respectively. The cash used was primarily attributable to cash paid for purchases of property and equipment for our technology infrastructure platform as well as capitalized software development costs. We expect property and equipment purchases in the near and intermediate term to be similar to or modestly lower compared to our most recent periods. We expect any increase to our operations to have a corresponding increase in expenditures for our systems and personnel. We expect our expenditures for product development initiatives will be relatively stable to modestly higher in the near and intermediate term and increase in the longer term in absolute dollars with any acceleration in development activities and as we increase the number of personnel and consultants to enhance our service offerings. In the intermediate to long term, we also expect to increase the number of personnel supporting our sales and marketing and related growth initiatives. Cash provided by financing activities for the three months endedMarch 31, 2022 andMarch 31, 2021 was$16,000 and$33,000 , respectively. The cash provided was primarily attributable to proceeds from stock options and the employee stock purchase program. Based on our operating plans we believe that our resources will be sufficient to fund our operations, including any investments in strategic initiatives, for at least twelve months, however the length and severity of the pandemic could influence our operating plans and resources significantly. Additional equity and debt financing may be needed to support our acquisition strategy, our long-term obligations, and our company's needs. There can be no assurance that, if we needed additional funds, financing arrangements would be available in amounts or on terms acceptable to us, if at all. Failure to generate sufficient revenue or raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements have been prepared using accounting principles generally accepted inthe United States (U.S. GAAP). Our critical accounting policies are those that we believe have the most significant impact to reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities and that require the most difficult, subjective, or complex judgements. The policies below are critical to our business operations and the understanding of our results of operations. In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of our results. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following topics reflect our critical accounting policies and our more significant judgement and estimates used in the preparation of our financial statements.
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--------------------------------------------------------------------------------Principles of Consolidation
Our Company consolidates all entities that we control by ownership of a majority voting interest. All inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the Condensed Consolidated Financial Statements in the prior periods to conform to the current period presentation.
Revenue
We generate the majority of our revenues from core analytics and solutions services. Our call analytics technology platform provides data and insights that can measure the performance of calls and texts for our customers. We generate revenue from our call analytics technology platform when customers pay us a fee for each call, text, or other communication related data element they receive from calls or texts or for each phone number tracked based on a pre-negotiated rate. As such, the majority of total revenue is derived from contracts that include consideration that is variable in nature. The variable elements of these contracts primarily include the number of transactions (for example, the number qualified phone calls). Customers typically receive the benefit of our services as they are performed and substantially all of our revenue is recognized over time as services are performed. The majority of the Company's customers are invoiced on a monthly basis following the month of the delivery of services and are required to make payments under standard credit terms. For arrangements that include multiple performance obligations, the transaction price from the arrangement is allocated to each respective performance obligation based on its relative standalone selling price and recognized when revenue recognition criteria for each performance obligation are met. The standalone selling price for each performance obligation is established based on the sales price at which we would sell a promised good or service separately to a customer or the estimated standalone selling price. In certain cases, we record revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third-party refinement of the estimated and reported amounts owed that occurs subsequent to period ends.
Stock-Based Compensation
FASB ASC Topic 718, Compensation - Stock Compensation (ASC 718) requires the measurement and recognition of compensation for all stock-based awards made to employees, non-employees and directors including stock options, restricted stock issuances, and restricted stock units be based on estimated fair values. We account for forfeitures as they occur. We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method. We generally use the Black-Scholes option pricing model as our method of valuation for stock-based awards with time-based vesting. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award, our expected stock price, volatility over the term of the award and actual and projected exercise behaviors. Although the fair value of stock-based awards is determined in accordance with ASC 718, Compensation - Stock Compensation the assumptions used in calculating fair value of stock-based awards and the use of the Black-Scholes option pricing model is highly subjective, and other reasonable assumptions could provide differing results. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See Note 6. Stockholder's Equity in the Notes to Condensed Consolidated Financial Statements for additional information.
Allowance for Doubtful Accounts and Advertiser Credits
Accounts receivable balances are presented net of allowance for doubtful
accounts and advertiser credits. The allowance for doubtful accounts is our best
estimate of the amount of probable credit losses in our accounts receivable. We
determine our allowance based on analysis of historical bad debts, advertiser
concentrations, advertiser creditworthiness and current economic trends. We
review the allowance for collectability on a quarterly basis. Account balances
are written off against the allowance after all reasonable means of collection
have been exhausted and the potential recovery is considered remote. If the
financial condition of our advertisers were to deteriorate, resulting in an
impairment of their ability to make payments, or if we underestimated the
allowances required, additional allowances may be required which would result in
increased general and administrative expenses in the period such determination
was made.
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We determine our allowance for advertiser credits and adjustments based upon our
analysis of historical credits. Material differences may result in the amount
and timing of our revenue for any period if our management made different
judgments and estimates.
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in business combinations accounted for under the purchase method. Intangible assets from acquisitions represent customer relationships, technologies, non-compete agreements, and tradenames related to previous acquisitions. These assets are determined to have definite lives and are amortized on a straight-line basis over the estimated period over which we expect to realize economic value related to the intangible asset. The amortization periods range from one year to 5 years. We apply the provisions of the FASB ASC Topic 350, "Intangibles -Goodwill and Other" (ASC 350) whereby assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead test for impairment at least annually. ASC 350 also requires that intangible assets with definite useful lives be amortized over the respective estimated lives to their estimated residual values and reviewed for impairment in accordance with ASC 360, "Property Plant and Equipment" (ASC 360). Intangible assets are "grouped" and evaluated for impairment at the lowest level of identifiable cash flows.Goodwill is tested annually onNovember 30 for impairment.Goodwill and intangible assets are also tested more frequently if events and circumstances indicate that the assets might be impaired. The provisions of the accounting standard for goodwill and other intangible assets allow us to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Events and circumstances considered in determining whether the carrying value of goodwill and intangible assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; and significant changes in competition and market dynamics. These estimates are inherently uncertain and can be affected by numerous factors, including changes in economic, industry or market conditions, changes in business operations, a loss of a significant customer, changes in competition or changes in the share price of common stock and market capitalization. If our stock price were to trade below book value per share for an extended period of time and/or we experience adverse effects of a continued downward trend in the overall economic environment, changes in the business itself, including changes in projected earnings and cash flows, we may have to recognize an impairment of all or some portion of our goodwill and intangible assets. An impairment loss is recognized to the extent that the carrying amount exceeds the asset or asset group's fair value. If the fair value is lower than the carrying value, a material impairment charge may be reported in our financial results. We exercise judgment in the assessment of the related useful lives of intangible assets, the fair values, and the recoverability. In certain instances, the fair value is determined in part based on cash flow forecasts and discount rate estimates. We cannot accurately predict the amount and timing of any impairment of goodwill or intangible assets. Should the value of goodwill or intangible assets become impaired, we would record the appropriate charge, which could have an adverse effect on our financial condition and results of operations.
Any future impairment charges could have a material adverse effect on our financial results.
Provision for Income Taxes
We are subject to income taxes in theU.S. and certain international jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in results of operations in the period that includes the enactment date. We determined that it is not more likely than not that our deferred tax assets (excluding certain insignificant Canadian deferred tax assets) will be realized and accordingly recorded 100% valuation allowance against these deferred tax assets as ofDecember 31, 2021 andMarch 31, 2022 . In assessing whether it is more likely than not that our deferred tax assets will be realized, factors considered included: historical taxable income, historical trends related to advertiser usage rates, projected revenues and expenses, macroeconomic conditions, issues facing the industry, existing contracts, our ability to project future results and any appreciation of its other assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. We considered the future reversal of deferred tax liabilities, carryback potential, projected taxable income, and tax planning strategies as well as its history of taxable income or losses in the relevant jurisdictions in making this assessment. Based on the level of historical taxable losses and the uncertainty of projections for future taxable income over the periods for which the deferred tax assets are deductible, we concluded that it is not more likely than not that the gross deferred tax assets will be realized. 23 -------------------------------------------------------------------------------- From time to time, various state, federal, and other jurisdictional tax authorities undertake reviews of us and our filings. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements.
Leases
We determine if an arrangement is a lease at inception. This determination
generally depends on whether the arrangement conveys to us the right to control
the use of an explicitly or implicitly identified fixed asset for a period of
time in exchange for consideration. Control of an underlying asset is conveyed
to us if we obtain the rights to direct the use of and to obtain substantially
all of the economic benefits from using the underlying asset. We have lease
agreements which include lease components. We do not have lease agreements which
include non-lease components or variable lease components.
Operating leases are included in right of use assets ("ROU") and lease
liabilities on our Condensed Consolidated Balance Sheets. Operating lease ROU
assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. Operating lease payments are
recognized as lease expense on a straight-line basis over the lease term. We
primarily leases office facilities which are classified as operating leases. We
do not have finance leases. ASC 842 requires a lessee to discount its unpaid
lease payments using the interest rate implicit in the lease or, if that rate
cannot be readily determined, its incremental borrowing rate. As an implicit
interest rate is not readily determinable in our leases, we use our incremental
borrowing rate based on the information available at commencement date in
determining the present value of lease payments. The lease term for all of our
leases includes the non-cancellable period of the lease. Options for lease
renewals have been excluded from the lease term (and lease liability) for our
leases as the reasonably certain threshold is not met. Lease payments included
in the measurement of the lease liability are comprised of fixed payments.
The new standard also provides practical expedients for an entity's ongoing
accounting. We elected the short-term lease recognition exemption for all leases
that qualify. This means, for those leases that qualify, we did not recognize
ROU assets or lease liabilities, and this included not recognizing ROU assets or
lease liabilities for existing short-term leases of those assets in transition.
We also elected the practical expedient to not separate lease and non-lease
components for all of its leases.
Recent Accounting Pronouncement Not Yet Effective
For discussion regarding recent accounting pronouncements not yet effective, see Note 1. Description of Business and Basis of Presentation of the Notes to our Condensed Consolidated Financial Statements.
Web site
Our web site, www.marchex.com, provides access, without charge, to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with theSecurities and Exchange Commission . To view these filings, please go to our web site and click on "Investor Relations" and then click on "SEC Filings." Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases,SEC filings, and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about us, our services, and other matters, and for complying with our disclosure obligations under Regulation FD: • Marchex Twitter Account (https://twitter.com/marchex) • Marchex Company Blog (http://wwwblog.marchex.com/blog) • Marchex LinkedIn Account (http://linkedin.com/company/marchex) The information we post through these social media channels may be deemed material. Accordingly, investors should monitor the above account and the blog, in addition to following our investor relations website, press releases,SEC filings, and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q.
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